You have worked hard over the last three years to save up enough money for a down payment on your first home. After meeting with your lender, you are faced with two loan options. Both loans are 30 year, fixed rate mortgages with payments of $1,800 per month. Origination fees will be 2% of the loan amount for either loan. Loan A has a contract interest rate of 3.0% with no points, while Loan B has a rate of 2.75% with 1.25 points.

1) What is your EBC if you select Loan A? Enter your answer as a whole number with 2 decimal points (no percent sign).

2) What is your EBC if you select Loan B? Enter your answer as a whole number with 2 decimal points (no percent sign).

3) If you intend to stay in the house for 30 years, which loan should you choose?

a. Loan A b. Loan B c. I would be indifferent between the two choices.

4) You decide you would like to limit your out of pocket closing costs, so you select Loan A, with no discount points. Your best friend is going to move in with you and pay $800 per month in rent. If you add the extra money to your monthly mortgage payment, how many years will it take you to pay off your mortgage?

a. 15.8 years b. 17.64 years c. 30 years d. 211.67 years

Five years later, you are offered your dream job in Turks and Caicos. You need to sell this house in order to purchase a new one where you are moving. Your roommate would like to remain in the home until they finish their PhD in 6 years. They are willing to sign a six year lease with the following terms: Rent will be $2,000/month for the first three years, and increase to $2,200/month for the remaining three years. The average investors holding period on residential rental properties is six years. You have estimated sale proceeds will be $530,688.37 at the end of the investors holding period. The appropriate discount rate is 4.2%.

5) What is the minimum price you should list the property for (i.e. the maximum an investor would be willing to pay)? Round up to the nearest whole dollar. *Remember, the value of an investment property comes from its cash flows. That is, you need to consider both the estimated proceeds at the end of the holding period AND the stream of cash flows the investor will receive from rent while they own the property. I recommend converting the monthly rents into annual cash flows for simplicity in solving this problem.

6) What will the investors going-in IRR be if they pay exactly list price? Round to two decimal places.

7) Rather than add your friends rent to your monthly mortgage payments, you have been saving towards your moving expenses. If you close on the home after making your last payment in year 5, how much will your loan payoff amount be (in other words, what is the outstanding balance on your loan after 5 years)? Round to two decimal places.

8) Assuming you sell the home for exactly list price, pay 6% in real estate broker commissions and $10,500 in seller closing costs, what will be your net proceeds from the sale? Round to the nearest whole dollar. *dont forget to include your loan payoff amount from #7!

You are starting to have second thoughts about moving. After going back and forth for several weeks you decide that you will make a decision based on whether or not you will refinance the house. If you refinance you will stay, if you dont you will move. You can refinance the home with a new interest rate of 2.75% for a 30 year term. You will refinance on the same day you would have closed on the home (so you can use the outstanding loan balance you calculated in #7 here). The cost of refinancing is 5% of the loan amount. Assume you anticipate selling the home (or refinancing again) in 7 years.

9) What is the net benefit of refinancing? Round to two decimal places. *Hint you are solving for net benefit of refinancing, not solving for NPV (so you do not need a discount rate to answer this question).

10) Will you be moving to Turks and Caicos?

a. Yes b. No